lesson 4 financial

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GDP = $100,000; taxes = $22,000; government purchases = $25,000; national saving = $15,000. Refer to Scenario 26-1. For this economy, investment amounts to

15,000

Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable funds?

The demand for loanable funds shifted rightward

Suppose private saving in a closed economy is $12b and investment is $10b.

The government budget deficit must equal $2b.

Crowding out occurs when investment declines because

a budget deficit makes interest rates rise.

As real interest rates fall, firms desire to

buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.

Financial intermediaries are

financial institutions through which savers can indirectly provide funds to borrowers.

Institutions that help to match one person's saving with another person's investment are collectively called the

financial system.

Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be

higher interest rates and lower investment.

The real interest rate is the

interest rate corrected for inflation

When the government has a budget surplus

it buys more of its bonds from the public than it sells to the public.

The slope of the demand for loanable funds curve represents the

negative relation between the real interest rate and investment.

If there is shortage of loanable funds, then

neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.

The slope of the supply of loanable funds curve represents the

positive relation between the real interest rate and saving

In a closed economy, what does (Y - T - C) represent?

private saving

An increase in the government's budget deficit means

public saving is less than $0 and decreasing.

At the broadest level, the financial system moves the economy's scarce resources from

savers to borrowers.

If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?

saving and the interest rate

In a closed economy, public saving is the amount of

tax revenue that the government has left after paying for its spending.

A change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment when

the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic.

When the government's budget deficit increases

the government is borrowing more and public savings falls

​Rob wants to create a personal trainer program service and needs to pay for equipment and gym space. He can finance this capital investment by

​All of the above

A larger budget deficit

raises the interest rate and reduces investment

A mutual fund

All of the above are correct.

The primary economic function of the financial system is to

match one person's saving with another person's investment

If a firm wants to borrow it can

supply bonds by selling them.


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